Liberalizing trade in services in Tunisia : general equilibrium effects

Abstract EN

The main objective of the paper is to simulate removal of barriers to trade in services in Tunisia by focusing on two modes; cross-border delivery (Mode 1) and commercial presence (Mode 3).

For the first mode, we model restrictions as tariff equivalent-price wedges.

Thus, the simulation of services liberalization consists of removing totally, or partially, these estimated tariff equivalents.

We assume for the second mode (Mode 3), that restrictions are a combination of monopoly-rent distortions and inefficiency costs.

Our approach consists of introducing excess cost directly into the production function through the total factor productivity coefficient.

Meanwhile, the rent component is handled in the same way as domestic taxes on sales of domestically-produced services.

Under this mode, we consider three scenarios varying according to alternative assumptions on the relative importance of excess cost as opposed to rents.

The first one assumes that prior to liberalization; firms did not have any market power but were inefficient by comparison to best- practice.

The second scenario makes the opposite assumption – that local production followed best-practice but that market power generated rents in the initial situation.

The final scenario is a mixed one assuming that inefficiency cost and rents weigh equally.

Results show that the potential welfare implications of services liberalization are clearly positive and substantial.

The liberalization of cross border trade leads to a small gain in welfare while the combination of rent generating and cost inefficiencies distortions has a more significant effect.

Welfare increases by more than 4 percent when we consider the two modes of service delivery and most of this gain is attributed to FDI liberalization.

The service share in production is relatively important, in particular when we combine the effects of Mode 1 and the mixed scenario of Mode 3.

This result confirms the idea that liberalizing services has a large impact on welfare.